Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Inergy (NYSE: NRGY ) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Inergy.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||8.8%||Fail|
|1-Year Revenue Growth > 12%||13.5%||Pass|
|Margins||Gross Margin > 35%||28.2%||Fail|
|Net Margin > 15%||(2.3%)||Fail|
|Balance Sheet||Debt to Equity < 50%||126.9%||Fail|
|Current Ratio > 1.3||1.59||Pass|
|Opportunities||Return on Equity > 15%||(4.3%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||8.2%||Pass|
|5-Year Dividend Growth > 10%||(8.2%)||Fail|
|Total Score||3 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings .Total score = number of passes.
Since we looked at Inergy last year, the master limited partnership has kept the same four-point score. A plunging share price hasn't made unitholders happy, and a recent dividend cut won't help matters any either.
Until recently, Inergy was best known for its propane business, in which it served residential and business customers across the country. The propane segment was responsible for three-quarters of Inergy's revenue and made almost as big a contribution to its pre-tax gross profits. Yet although competitor Ferrellgas Partners (NYSE: FGP ) also posted losses over the past 12 months, AmeriGas Partners (NYSE: APU ) has fared far better with a healthy profit.
Late last month, Inergy made a big strategic move in selling its retail propane business to Suburban Propane (NYSE: SPH ) for $1.8 billion. That deal includes $200 million in valuable cash available to service debt and also gives unitholders an indirect stake in Suburban Propane going forward, arguably giving them similar economic exposure as they had before the deal. But the company cut its dividend by almost half, and investors now question what Inergy will do with its remaining midstream assets.
Last year, Inergy created a subsidiary MLP called Inergy Midstream (NYSE: NRGM ) to hold its natural-gas storage and pipeline assets in the Northeast. Inergy retains a 75% interest in the midstream unit, and with it becoming a passive investor in Suburban Propane, Inergy will presumably focus its attention on expanding midstream operations -- especially if activity in the Marcellus shale region continues to rise.
Inergy needed to make some sort of move, but this transformative series of events was likely more than most investors were looking for. For the company to get back on the road to perfection, it needs to make this midstream strategy work while also seeing Suburban succeed. If it gets that winning combination, then unitholders could finally get respite from big price declines.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
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